tonight on the "kudlow report," is oil going to $20 a barrel? yes, says veteran analyst phillip ferleger. and i say regulatory limits to oil trading is a terrible idea. government should quit meddling in this and everyplace else. plus, is google aiming a death blow at microsoft? it's chrome versus windows, a new high-tech melodrama. meanwhile, the first profits report of the post-credit cries sis season, alcoa loses money, but beats the street. the big story today, stocks up slightly, but a downdraft in oil, gold, commodities and treasury rates. investors are still concerned about our economic future. we're going to try to show you where to put your cash. fasten your seat belts, everybody, the "kudlow report" begins right now.

good evening, everyone. i'm larry kudlow, welcome back to the "kudlow report," where we believe free market capitalism is the best path to prosperity, and that includes letting oil markets trade without government meddling, limits or controls for both large and small investors for the broadest possible base and the largest volume, all of which will make it a more efficient market. that's really topic "a" tonight as oil prices continue to drop with economic fears lingering among investors and, therefore, prices are coming down. what's so hard about this story? you know, if president obama and vice president joe biden misjudged the economy, why can't we cut some slack for oil traders who decides oil demands will not be so strong? and, by the way, if we'd stabilized the value of the

dollar, oil prices would probably be less volatile. but speaking of volatility, the vix index for stocks has been incredibly volatile. i don't see tin horn, flat-foot politicians calling for a limit stocks, do you? and england's gordon brown and france's nicolas sarkozy say oil prices need government supervision. nonsense. oil prices need market supervision. and you, gentlemen, need adult supervision to stop meddling in markets or trying to control prices. now, tonight we will debate a $20 oil forecast in a few moments. we will let you, the viewer, divide. but i'll say this -- if team obama would deregulate energy and drill, drill, drill and make it easier for our canadian cousins to send us oil from the oil sands in alberta, the oil price would be a whole lot lower with greater inventory supplies and our enemies in the middle east would be a whole lot poorer. yes, i believe oil trading and

other market trading should be totally transparent, but all forms of market price meddling or price controls would be an unmitigated disaster. and incidentally, the markets will move offshore if we mess with them. so, let market freedom rule. drill, drill, drill. work with canada. stabilize the dollar. call it king dollar and accept the fact that markets always work better than government planners do. what is so hard about this? lord! first up this evening, before we dive into all this, cnbc's rebecca jarvis joins us. she's got the rundown on the market, and, you know, rebecca, alcoa looked pretty constructive. this is the first earnings report of the new earnings season in what i think we can call the post-credit crunch financial crisis world. so, what can you tell us? >> yeah, it's a good point, larry. and we can tell you that alcoa came out ahead of expectations.

stocks ended today's session flat. commodities fell. oil down a strictd straight session, and investors, they certainly favored treasuries flocking to ten-year options with a bid-to-cover ratio of nearly 3.3. getting back to the comment larry made about alcoa, after the bell, kicking off earnings season, a beat there. announcing a smaller-than-expected quarterly loss. but still there are concerns over demand. and oa more positive note, the president and ceo said he's seeing a pick-up in demand for trucks and a stabilization in auto demand. now, over in tech land, an operating system smack-down unfolding. the goog taking on microsoft's cash cow, windows, with its own operating system based on the nine-month-old web browser, chrome. and speaking of the web, a cyberattack on nyse, its website, nyse.com was part of a

cyberattack. the company telling cnbc that the attack did not impact trades. both cme group and nasdaq said they did not have problems like nyse. outside of treasuries, investors flocked today to the safety of drug stocks, health care names with amgen announcing positive findings for an osteoporosis treatment for breast cancer and some positive news on the retail front. family dollar delivering a major earnings beat. a strong forecast, and we also heard from the fed, however, that consumer credit fell 1.5% in may. consumers trimming their borrowing for the fourth straight month. the question going into tomorrow -- is how does that play out for the retailers in the month of june? we'll get a better picture with june same-store sales report. but don't forget, walmart is not coming to the party. they took themselves out of the bunch. they opted out of the monthly same-store sales figures. >> retailing stocks were up 2% today, which is a heck of a number, as you note in advance of the same-store sales for the month of june.

rebecca, just walk be back, the cyberattack story. >> sure. >> is there any hint at all that this is from offshore? and, you know, i'm thinking north korea. >> well, i mean, those names in the blogs have certainly been circling. and there's certainly a sense that this is potentially coming from offshore. it started around the fourth of july. or before that time. and the name korea has been linked to some of these reports that we're seeing, larry. >> all right, rebecca jarvis, the world is still a dangerous place. thanks ever so much for your report. so, how can we make some money in this market? how can we put some cash on the sidelines into this market despite the various uncertainties? here now to guide us is david sauerby of loomis steals and david patrick senior contributor to realmoney.com. two of my favorite gentlemen. hello, men. >> good evening. >> let me just start, this is to some extent the first earnings season and the first earnings report from alcoa of the

post-credit crunch, whatever, the post-financial crisis. whether we agree that banks are healing is worth debating, but i think we can agree the worst of the crisis is passed. david sauerby, all co-wa in a lousy commodity price downdraft that they've had to weather for the last year, in the world recession, actually beat the street -- >> yes. >> -- and what's interesting is not only did their earnings come out better than the estimates, even though the year-on-year revenues were lousy, sequentially revenues actually picked up in q2. alcoa is a commodity firm, i don't want to read too much into it. i want to get your thoughts on this. is it possible it is a constructive beginning to the earnings season? >> it has the potential. maybe what wall street is missing is just the fact that companies have shown much greater capital discipline over the last couple of years. better capital spending, better management, free cash flow, better growth in free cash flow, and i think that's what the

market has been missing in this economic malaise of the last six to nine months. by the time we write the final tape, earnings will probably be down about 15% to 16% year-on-year for the second quarter. about the what will be the rest of the story is the -- is the continued improvement in free cash flow and, again, better capital discipline for corporate america. >> do you think that that improvement will encompass revenues from sales? because that's a big issue. there's a lot of people saying this is it, you know, cost cutting, job cutting, inventory cutting, but the sales side of the story, david, is going to be the weak sister, the achilles' heel, my pal doug cass and some others have made this point. where do you come out on it? >> marginally better for this reason, the retail numbers as you pointed out, have been faring generally better than expectations for the last three months. here in michigan, we know that motor vehicle sales have been coming off the nearly left-for-dead numbers of two or three months ago. all of that is the result of now

nine months of the most aggressive fed easing i have seen in my lifetime and sales numbers, marginally improving are the direct result of that. >> all right, dan fitzpatrick, come to you on this. you heard david sourby on this, first of all, give me a quick response -- i want to move on -- but give me a quick response. david thinks the alcoa story is a rather constructive beginning to an earning season that could be more constructive than the pessimists think. where do you come out? >> i err on the pessimist side simply because you can't keep containing costs and expect the market to buy it as growth. as you know, that's a different deal. but i do find it a little bit ironic that the markets reacting positive -- positively to alcoa because it's cutting costs, yet at the same time what are we doing as a nation? we're spending just as if we had the money that we're spending. >> fiscal nympho mania, no cost cutting from washington, that's for sure. >> really that's one of the reasons why i'm pretty

pessimistic about the market in general right now, not to take you off your game where we're going right here. but the bottom line is, i think the market and the individual investor is starting to realize that maybe this is not just going to be as easy as just dumping money on top of money to get us through it. >> all right, we got a lot of ground to cover. alcoa lost 26 cents a share. the street estimate was 38 cents a share. revenues are way down. over 40% from a year ago. but sales revenues are actually up sequtially. that's for people who are following the alcoa story. dan, on the other hand, economic worries are back. i have talked about this. i've blogged and written about this. i, myself, am postponing the recovery story. the jobs and earnings and income numbers and wage numbers were awful from last thsday in the june jobs report. and i note -- and this is where i want you to go -- we are seeing a downdraft in most of the cyclical stocks. that's the heart of this correction. we are seeing today gold off $14

to $9.10. oil off to 60 bucks, just over $60. over 3%. the crb commodity index off 2%. dr. copper off 2% and really in an amazing statistic, treasury bond rates, the ten-year treasury down all the way now to 3. -- no, 3.29%. a month or five weeks ago, that thing was 4.25%, now it's back to almost 3.25%, i'm regarding that as a lower expectation of the economic growth, dan. how do you see it? how do you play it? because there's enormous cash on the sidelines. >> right. >> maybe it's time to go into corporate bonds. i don't know. we need some advice from you on this. this downdraft in commodities and fears of no growth are real. >> they're absolutely real. i think it's a little too late to be getting on the corporate bandwagon right now. but it is telling to me, i mean, you kind of said it as far as all the cash on the sidelines. i hate to be a party pooper, but

i've been telling the folks that i talk to that, really, just on the sidelines waiting and seeing is not a bad place to be. because we are at that kind of tipping point with a lot of the different -- >> you don't get paid for it. >> no. >> the problem with the cash story is you don't get paid for it. i'm looking at the sheets. the treasury bill is, what, 18 basis points? that ain't great. now, i know if you had been in cash for ten years -- i saw barry ritholz blog, you probably would outperform stocks. but we're not talking ten years. forwards, futures, the world ahead of us. you really want to be in cash making 15, 20 basis points? is that the best way to do? >> not a chance. >> jump in david sourby, i was waiting for life signs from you. i know you're an optimist. >> i'm a realist. >> i'm kudlow. that's all i am. i read the data. the data stank on the world report, but that doesn't mean the world is coming to an end, david. >> we've had four months of a better improvement in the

corporate bond market and we are only in baseball terms about the middle of the fourth inning because there can be potentially additional spread tightening to treasuries that equates to better performance for corporate bonds. the yield advantage is still quite compelling. i think you've got more spread tightening to get back to those long-term averages. >> how you -- not how you, investment grade corporate bonds. >> it looks compelling. 7% yield. >> 7%. you got a 7% yield and that's baa on the moody's index. that ain't bad. where else would you go right now, dave sourby? you got to acknowledge this recovery story, the recession may be coming to an end, but i'm not sure i see clear evidence of a recovery beginning. you're in the middle ground and you got a ka trillion dollars worth of cash on the sidelines. what is your strategy? you heard from brother fitzpatrick, what is your strategy? >> if your eye is importantly on the next 6 to 12 months, i think you want to watch for the

potential 10% selloff in stocks to be rebalancing back to stocks. you and i have had conversations that the small-cap arena rallies quite typically off of bear market bottoms and it still will this time and it looks compelling. particularly in the corporate bond market ratifies the cyclicality of the small bond market. >> they were hit the hardest. >> the cash flow was still very come elling. >> the nasdaq was up, and the s&p was off a point. small caps, though, were down almost a full percentage point, dave, so you're saying let them sell off and come in and buying, is that your point? >> you're saying you want to be in cash along with me. when the market falls another 10%, though, bring me back and i'll tell you what you need. >> he's putting words in your mouth. he's putting words in your mouth, david. will you agree with those words and will you accept them in your craw? >> no, i think you do it sooner than that. >> sooner? >> with the belief that a year from today, corporate bonds will outperform cash and it's an

environment where valuation is still quite compelling, even though the stocks aren't as dirt cheap as they were in march, they're still very compelling on a free-cash-flow basis. >> where is the outperformance going to come from? >> i got to get out. we're after the 15-minute mark on the hour. both of you stay where you are. up next, google in an all-out assault on microsoft, this could we eric schmidt hunting down steve ballmer with a handgun. oh, my gosh, i don't want to raise that. the search giant is rolling out a new operating system. is it the death of microsoft? that's what we have to discuss. and then coming up later, a big market-impacter, and game-changer. could it be that we are headed for $20 a barrel oil? noted analyst phillip ferlager, will make that case. plus another attack on free-market capitalism. washington now wants to wage war on something called oil speculators. i regard that as the dumbest and stupidest thing in the history of the earth. we did this last summer. do you remember those

investigations? nothing was wrong. markets are smarter than ivy-league planners! you're watching the "kudlow report." we like economic freedom. could someone toss me

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hand-to-hand combat, make six gun the is gun, google plotting its death blow to microsoft by developing their own google operating system. the search giant is going after the holy grail of the computer world, that is, microsoft's windows. for more we bring in "fortune" very writer, our friend dave sowerby and dan fitzpatrick are with us to kibitz heavily. dave, what do you think about this? what's your quick take on this? >> i think it's 80%, 90% -- >> i want to go to mr. forte. i said david. i meant mr. forte. you're our reporter here. i beg your pardon. >> i think if eric schmidt wants to bag baum mer, he will need to bring out the big guns. it's not clear he's got any. look at apple, they do so many things well and they've only got, what, 5% of the global markets in pcs. it's good that google is going

to force microsoft to really think about the pricing that they put on windows for netbooks. they're really going after this mobile market that's exploding right now. carriers want to carry netbooks, the wireless carriers want to carry them. but really googles hasn't proven that it knows how to craft software at this level. googam hasn't proven that it plays well with others in the pc ecosyste ecosystems. they are good at doing their own thing but are they able to get the printer drivers all together that you need to do. >> john, believe me, i'm no expert. i use the windows systems, i think there are a lot of problems with the windows system. even on a good computer that i use at home on my desktop, not the crummy dell computers in the newsroom. the windows system goes down all the time. that bothers me. can google improve on that? and they say, by the way, that they're going to be compatible with what is it linux and mac also. is that true? no, they may be starting small, but they're going to ramp up and

really give microsoft a run for its money. i guess that's what investors would like to know. >> what google wants to do is have a replacement for windows. they want flip open your computer and immediately see google as soon as you turn it on. can they fix all the bugs? well, it's tough stuff. apple has bugs, too. microsoft's got bugs. you can guarantee that google is going to have them. you look at the chrome browser that they came out with about nine months ago, there are all kinds of complaints about the bugs in that. google doesn't do perfect, and they're not going to have a perfect product. >> google is not going to hit the business side, are they? there's no chance of that. >> no. the businesses aren't going to jump on this until google can prove that not only do they know what they're doing, when they're doing pc operating systems, but that they're compatible with all kinds of systems that businesses need to run. erp, crm, the printers and copiers in an office. google is a long way from being able to do that. >> a long way. all right, what do they got, 90% plus of their revenues still

come from the paid advertising. dan fitzpatrick, is this going to be like a john wayne movie with schmidt stalking ballmer, or how do you read it? >> i don't know. it does almost seem personal between the two of them. >> it does. i like a little personality, a little venom, i think that's what you've got here. i don't think the guys like each other. >> no, i think it's a great spectator sport. microsoft is do the bing bling thing, i like it. i'll have to use it again. the biggest thing just as a consumer and as an observer of consumers, i wonder how much concern there's going to be about running all these essential programs over the internet. i mean, when are we just lead off with tonight, you know, a cybercrimes, cyberhacking issue? >> right. >> i just think there's going to be some real consumer resistance and if you put a few bugs in there, i had to take chrome off of my computer. it was making it heavy. i think there's a lot of issues here. >> that's very interesting. that's an interesting point.

dave sosowerby, you want to rea, more mischief can from chrome but could be an unintended consequence, david? >> right. >> we'll see. i think the bigger picture on this, too soon to tell, is microsoft has the 80% to 90% market share in the netbooks. google has done exceptionally well on advertising revenue, but they are going to target more software sales to broaden their -- to broaden their balance sheet and their income statement. if you look at where the netbooks target, more -- more web-based applications from facebook to e-mail. that to me fits right into the google wheelhouse and it gives them a chance to chip away at that 80% to 90% market share. >> you buy google? you own google? i know you are a small-cap, value guy, but do you buy google? do you have a position? >> my firm owns both names. and this is still too soon to talk about what investment decisions would be made off of,

you know, just early, early news in this environment. and in the case of microsoft, you know, valuations are extremely compelling. you hear me talk about free cash flow. microsoft is very abundant from that measure. so, it will be interesting to see. you're getting a heavyweight battle here. a $200 billion market cap company against a $125 billion market companies and there aren't that many market cap companies left after the bear market of that size. >> david real quick, yes or no, at the end of the year, s&p 500 above where it is? >> it's down 3%, it better be. >> dan, yes or no, markets be higher end of year than they are today? >> ultimately higher. between now and then, lower. i'm waiting. >> john forte, you want to take a whack at that? come on, buddy, i know you have an investment strategy in there. >> i'd say higher but -- >> john, let me ask you a question from a technology coverage standpoint, google and microso microsoft, does this change the

calculus between the countries today -- the companies today? does it change anything in your opinion? >> larry, it doesn't. google had it in for microsoft. they are trying to do to mikio soft what they did to netscape more than a decade ago. microsoft wanted to use its pc position to make the web cheap and move in there. google is trying to move its web motion to make pcs cheap and move in there. >> microsoft has a new windows system coming out, write? is it going to be better? can i complain less? is such a thing possible? >> i think you will absolutely complain less. there's a plenty of upside for microsoft. they have that and a new version of office coming out. >> thank you very much. >> thank you, larry. >> you're all terrific. so, this is really the heart of the thing. as oil prices are dropping, congress looks to shake out speculators, but who should regulate commodities, government or the markets? dick armey is going toive us his take later.ç you know where that' going to ç go. up next, the main bout, $20 a barrel oil.ç all right is it a real ç possibility?

one of our next guests has been around a while says yes, the other one says no. we're going to let the viewer decide. me, i think oil's way too high, but that is if we would drill, drill, drill and let the canadian oil sands into america penalty-free, we could help ourselves for a ching. why don't we get king dollar also? and while we're at it, stay with the "kudlow report."

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closed just above $60 today. it's been dropping six straight days. there's a sea change on fears of a worsening american economy and maybe global disappointment as well. oil is at its lowest level since mid-may, probably poised to descend through 60 bucks. our question this evening -- could it psibly get to $20? talk about a tax cut. holy cow. that's almost as good as drill, drill, drill. so, let's hear this story. we have phil verlager, who is professor of business university of calgary, he is the proud owner of the $20 oil forecast. on the other side of the trade, we have dave percell, manage director attituder, pickering, holt and company securities. hello, gentlemen. phil, it's good to see you. i apologize right up front for not quite getting your name right on the program last night. >> you got it fine. thank you. >> i've been well briefed, believe me. i fried to francophile you, but you're phil verlager and you had a lot of great experience. in brief, give me the $20 oil

scenario. i tried this out on the morning show. i got mbrains beatenin, but i'm not running, phil, i'mall ears. >> larry, i heard you on the moing show. the $20 oil story is relatively simple. u ow, it may not -- i think $20 is where it could go briefly at the bottom. oil was $31 in deer. got up $ a few days ago. the price shouldn't have increased. we have a huge surplus o th world market even wh the o cuts. it's runng a million and a half barrels aday. i've been following this since 19, we have never had a 12-month stretch withuch a large urplus. so, why have pricecome up? well, the answer -- there are two answers and they both go to kindf the effects of rnment intervention. mr. sowerby earlier tay -- earlier inhe program talked about the federal reserve board's program that's hd michig. well, what it d was make it very inexpensive to buy and ho oil. at the same time, man

investors, many of whom watch your show, are afraid that we're pushing out too much money and inflation will go up, and so they have been buying forward oil, so oil prices -- >> that drove it up as the dollar came down, if we'd ever stabilized the fed and their policies and stabilize king dollar, we probably wouldn't be so volatile, but all these flat-footed politicians are too dumb to understand that. but, phil, you got all this oil on the high seas. you got all this oil on the high seas, is that's what's going to ive it down to $20 barrel? well, no. it's running out of storage space. when i said that investors raised the price, i went the forward price. six-months forward oil was selling at $16 premium to cash oil. so, there's an example where morgan stanley a month ago or jpmorgan a month ago according to bloomberg bought 15 billion barrels of heating oil and parked it on the mediterranean. they are earning a risk-free return of 50%, maybe 40% and

they borrowed the money under the talf program for 3%. if you can borrow -- if you can make 50% and borrow at 3%, why not do that? so what's happened is roughly $30 billion has gone into stockpiling oil. and it's all been created by the market conditions, and i -- >> phony as a $3 bill. hat what you're saying? it can't last. it can't last. >> it cannot last because -- >> let me give dave percell in. i want to give you equal time, dave. you don't buy it. you got it going up towards, what, $80, $90, 100 bucks? >> i'm going to tell you we're at $50 for the back half of this year. there's no question -- >> oh, $50 for the back half? >> yeah. there's no question the oil market's fragile here, but if -- as you think about -- look at u.s. inventory friends. november and december, you look at how inventories trend relative to normal to figure out whether you're under or oversupplied. we were clearly a million

barrels a day just in the u.s. oversupplied because demand had fallen away. first quarter, 500,000 barrels a day. second quarters continues to tighten. the last four weeks, inventory change, all in, crude plus products, much more balanced. >> what if demand falls? you got a lingering we're, a lingering fear -- and i must say, even though i try to be as optimistic as i can on the future of the american economy. i may see an end to the recession, at least a bottoming, i don't really see the recovery, and i wonder globally are we betting too much on massive demands from china? china's going to report a 7.5% gdp in the second quarter, that's good. but it ain't 10%, dan. that's what i'm saying. are you sure that energy demand along with all the excess supplies that phil is describing and all the phony financing of barrels on the high seas, are you sure you couldn't get a massive drop in the short run? >> look, to get to $20, you'd have to have another air pock

net demand in -- in my opinion. i think you really have to get a world that has a significant amount of excess capacity. we're looking at 6% excess capacity, i think there's 5 million barrels a day of excess capacity out there. opec cut 3.5 million plus some residual capacity we had last year, contrast that to the early '80s, right? we had double digits, you had 12 million to 15 million barrels a day of extra capacity. >> not even phil says we'll go down there. we're running out of time, my friend. we're on $60, probably on the way to $50, that's what it sounds like you're agreeing on. i'll throw my hat in with that. in terms of getting to $40 or $35, whaprobability on a scale of 1 to 10,phil? >> i think iut it at about a 0.6 to 0.7 that we at least get down t the low $40s because we ha this gap in demand. youaid it out.

no growth in theeconomy. e notalling away, but -- we were earlier in the year, but in the end it's going to be down. >> it could be temporary. i'm just saying i think the growth story is going to disappoint. look, not forever. we're going to have a recovery, but you know what, phil, it may be a lousy recovery, given all the anti-business things coming out of washington and all the st of it. in a 2% recove, how would tha affectour oilorecas >> i have out a 2% recy and you t around $40 a barrel. maybe $35. >> wow. >> that' where we should be. >> think that's the clincher. i don't know. that's the clincher, phil verlager, great to see you, dave percell, thanks for helping us out this evening. coming up from washington to politics, we are following the stimulus money trail. how are the billions of dollars in taxpayer money being spent? i'll tell you how, poorly. the "kudlow report" is coming right back. how about economic freedom? how about helping businesses to grow, america? rformance machines.

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all right. here's a quick update reset on on today's market action. stocks were slightly higher. and, by the way, alcoa led off the post-credit crunch earning season with a smaller-than-expected hos, that after the bell, the stock traded higher.

but economic worries continue to sell off oil. now down to 60 bucks and heading south. gold off big. the crb commodities down big. dr. copper also down. interestingly treasury yields, the ten-year, all the way down to 3.29%. call it 3.25%. that is almost down 100 basis points in just the last month or so. economic jitters have re-entered the story. now, let's turn to washington, where lawmakers held hearings on the hill today. we are going wall street to washington, money and politics, and find out how all your taxpayer billions in stimulus money is being spent. cnbc's chief washington correspondent, john harwood, following the money trail. hello, john. >> reporter: larry, we're at a fascinating moment in the debate over economic stimulus and the economy, and you can tell it from the remarks today from house minority leader, john boehner. he said vice president biden over the weekend when he said we hadn't realized how bad the economy was when he took office

was lying. >> now, this is the greatest fabrication i've seen since i've been in congress. i sat through those meetings in the white house with the president and the vice president. trust me, there's not one person that sat in those rooms that didn't know how serious our economic crisis was. >> reporter: and at a hearing today on capitol hill, republicans said not only is the obama economic stimulus plan making the deficit worse, it's bad economics, which is a tricky argument for democrats to respond to. governor ed rendell of pennsylvania, a democrat on cnbc this morning, said that the stimulus has, in fact, kept the economy from being even worse, but he acknowledged that we may need a booster shot. >> without the stimulus program, every state budget in this country would be in far worse shape. tons of state workers, county workers, teachers, police would have been laid off. but i think there was too little of basic infrastructure, the one -- the projects we can start right away, the shovel-ready, fix-it-first projects. there was about $100 million of that, i think it should have

been double or triple that. if we do a new stimulus, it can be modest. it can be $200 million of all infrastructure. that's what gets people back to work. >> reporter: but, larry, ed rendell's arguments face an uphill fight within the obama administration because they're concerned about any step while they think the economy is recovering that will fuel republican arguments that this is simply more runaway spending. difficult situation democrats have found themselves in, larry. >> thanks, john. i want to see if i heard this right, did i hear governor rendell say a modest package of only $200 billion more money? that is insanity. does anyone guard the taxpayer money? do the states have any fiscal restraint left. oh, my lord. coming up, on the "kudlow report," there's a global attack on so-called oil speculators. i can't begin to tell you how much i am against this nonsense. i'm for free market capitalism. i think these politicians need adult supervision. i think oil markets need market

supervision! how about that for a change? market supervision, protect the taxpayers' money. throwing money after every single economic problem hasn't worked, won't work. we need incentives and rewards, and in a pinch, let's deregulate and cut tax rates. this is the "kudlow report," we will be right back to argue against oil market rerulation! you have questions.

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all right, policymakers now on both sides of the atlantic ocean are trying to crack down on so call oil speculators. i love oil speculators. i love speculators of all kinds. i also love cnbc's hampton pearson who is going to give us a full update on this meddling exercise. hello, hampy. >> hello. let's start with nicolas sarkozy and british prime minister gordon brown sounding the alarm in today's "wall street journal." and i quote, government can no longer stand idle. volatility damages both consumers and producers. two leaders plan to bring their ideas for controlling extreme price volatility to the g-8 summit at the top of their list, greater global transparenctrans. make no mistake about it, energy commodities trading is where the action is. look at these eye-popping numbers on the explosive growth

in energy commodity efts. now, there are 17 funds have amassed $8.3 billion in just two years. >> we have investors who are looking for the next game in town. who want to be part of the inflation play, who want to be part of a market going up and have some volatility to it. now, this is not what the commodity markets were designed to do. they were never designed to be investment vehicles. >> now, federal officials define speculators as investors who don't use or produce commodities but are primarily interested in betting on prices. the new head of the cftc wants tougher position limits to curb commodity speculation. on capitol hill, lawmakers who failed last year to get speculation restrictions through congress are set to try again. there will be intense opposition from the oil industry, major investment banks, and the exchanges. now, momentum for trading restrictions could take a back seat, however, to health care reform and energy policy.

and the other fact of life, larry? the congressional calendar. we are, after all, less than a month away from the august recess. >> you know, hampton, just as a quickie, old buddy, i know you don't want to do opinions, you're just reporting. but betting on prices, whether it's stocks or oil or commodities, that's what investors do. that's what they do. didn't we have a rerun of this last summer when oil got to $150, everyone when berserk? the cftc and the ftc all looked a it and came up with nothing? >> they were on the sideline, you're right. there is such a thing as good speculation. >> yeah. >> and right now, look at where we are in the real world. oil prices are falling. >> right. >> and gasoline at the pump is cheaper because there's the concerns we're going to have a weak to almost nonexistent global economic recovery. >> see, that's it. you put it very well. i don't have to say another nickel. hampton pearson, you are absolutely terrific. thank you very much. >> you got it.

coming up on the "kudlow report," the big question tonight, do oil prices need regulating, huh? you know my view. we'll have a spirited debate with david goodfriend and dick armey, the former house majority leader, a passel of free market capitalism, god bless them ap all that after the break. can you imagine such a thing? investors betting on price movements? oh, my goodness, heaven forbid. the "kudlow report" will be rit back. taking its rightful place in a long ne of amazing performancmachines. is is the new e-coupe. this is mercedes-ben

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welcome back to "kudlow report." big question tonight -- do oil prices need regulating? and controlling? so, we have dave goodfriend, former clinton white house official and co-host of the sirius radio show "left jab." we also have dick armey president of freedom works.org and former house majority leader. dick, this is too easy for you. i got to go to moor goodfriend first, i want to hear what we're going to hear from the clinton white house no less. go ahead, dave, what's your take on this? >> larry, i love you and i love your show. but i was listening to jim before you came on, and on this one cramer is right and kudlow is wrong. did you hear what jim cramer said -- hold on a second. >> if it were stocks, that's my point. i love jimmie cramer. i love the guy. >> that's a fair point. here's what jim cramer said, he said the current oil futures market is a mockery of a shame, and he's right. here's why, in the year 2000 when my former boss, bill clinton, signed it into law, and i'm not proud of that, the enron

corporation lobbied for and got what the senate committee on investigations said were the enron loopholes. what does that mean? what it means they were able to get all commodities regulated in the future except -- except -- for energy and oil. electronic exchanges became unregulated. off shore, and multinationals unregulated. what did that do? by the way, do you know what that law also included, an exemption from state gambling laws, why, because gambling and the effect, the effect was to raise prices. artificially, not based on supply and demand. >> is an issue here. you make some good points. but dick armey, look, there is a good point here, limiting trading, that crosses a line, dick. >> right. >> that moves me toward price controls. and do you know what, these guys, what is it, sarkozy and gordon brown from england and france, they say we need supervision in markets. i say those guys need adult supervision and i think the market ought to supervise oil

prices. what's your take? you're a congressman from texas, formerly? >> well, there's a simplistic view that people who speculate about futures prices set the prices. but that's belied by the simple observation that for me to be willing to buy at $206 months from now can only happen if someone is willing to make the counterbet and be willing to sell at $20, so what we're doing between them as hayak pointed out so clearly is we're discovering the price. we're not setting the price. and if you take that away, you take away an essential element of capital allocation. >> right. >> which is what's been missing in the housing industry for the last ten years. >> that's the good point. free movement of price. hold on a little bit. we've had a change in our technical plan. we're going to come right back after this. i want to hear much more. heaven forbid small investors

should be able to change index funds. mr. goodfriend of sirius radio on the right, mr. armey of serious thinking on the right. i'm kudlow and we'll be right back. the mostnnovative companies in world

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all right. we're back talking about regulating oil prices. we've got dave goodfriend and dick armey, two good friends of this program. dick armey, let me throw a couple things on the table here. we've got three minutes to go and we can settle this thing. first of all, stocks are every bit as volatile as oil if not more so, the vix indecision of volatility got as high as 80 this winter now it's down below 30. i don't hear people saying let's limit stock trading. second point, if obama and biden can get the economic story wrong, meaning two rosy, oil traders made the same mistake, they bid up oil expecting a faster and stronger recovery. now they see the recovery's going to be much weaker and take longer. so, why are they blaming oil traders instead of the -- because they made the same mistake the white house made, dick? >> well, what you really have is people of government now are speculating themselves that the prices in the future may go to where it is inconvenient and

uncomfortable for us to live with the consequences of the ill-advised policy moves we're making today, therefore, in order to protect ourselves from the natural consequences of this bad policy, they want to say, well, let's put on another layer of bad policy and give us further power to control the marketplace. something they have neither the knowledge nor the understanding to do with any degree of effectiveness, which is, of course, why they lost the great debate to von beces over a half a century ago. >> i'm all for transparency and disclosure, yes, but i am not for limits or controls or any of that nonsense, and i want to ask you, why the heck shouldn't ordinary, mom-and-pop, main-street investors, through exchange traded index funds, have access to the same commodity markets, just like they have access to the stock markets as the rich bankers? that's another thing that bugs the heck out of me.

>> well, that's an interesting statement, larry, because i think you're two concerns are in tension with one another. if you have transparency, if you have real capitalism where supply and demand are matched, then you don't allow a certain elite class of traders as the only ones who have access to the market, i agree with you on that. >> but you don't understand, the argument is being made that somehow the index funds are wrecking the market. i say these indexes are helping the market, and instead of limiting the trading volume, i want more and more volume which will make it a more and more efficient price-setting discovery mechanism. >> let's go back to history. i'm dealing with the former professor of economics on the other side here, so, professor, you make sure i get this right. but position -- >> 25 seconds. >> -- position limits really were derived from the attempts by -- by investors to corner the market. i mean, most recently we had people trying to corner the silver market